The rapid growth in debit card transactions has intensified the philosophical debate and raised the business stakes in the contest between the two variations of debit.

The alternatives have been on a collision course for years, but the major bank card associations are increasingly under fire for their advocacy of off-line debit processing. Though transaction amounts are debited directly from checking accounts, they clear via the MasterCard and Visa credit card settlement networks, which entails a delay of more than a day before the actual debit.

Regional electronic banking networks-the groups that link thousands of automated teller machines and point of sale terminals-are wedded to on-line debit. Transaction amounts tend to be debited immediately from cardholder accounts.

The MasterCard and Visa associations have on-line as well as off-line products, but their member banks earn more on off-line transactions and therefore have a strong incentive to promote them.

At the same time, the higher fees for off-line debit acceptance have riled the retailing community, which prefers the lower-cost on-line version.

The biggest retail store chains and their trade associations have a class action pending against the bank card associations in U.S. District Court for the Eastern District of New York, Brooklyn. They are specifically challenging the MasterCard and Visa rules that require stores to accept off-line debit cards on the same terms as any MasterCard or Visa cards. They do not have the option of accepting those brands of credit cards and rejecting the debit cards.

In practice, bankers are neutral, waiting to see if either type of product emerges as consumers' favorite. Debit overall has been growing at annual rates well in excess of 50%.

As consumers continue to switch from cash and checks, millions of dollars of potential bank, merchant, and ATM-POS network income are at stake.

Bankers might be concerned that on-line debit cannibalizes potential off-line revenues. And many of the thousands of banks that own MasterCard and Visa also have interests in ATM networks that both compete and cooperate with the national and global associations.

"There is a major disparity between off- and on-line," said Thomas O. Bennion, president and chief executive officer of Honor Technologies Inc. of Maitland, Fla. "That disparity is becoming much brighter on everyone's radar screen."

The price differences are significant. Merchants in regional electronic funds transfer networks typically pay 3 to 11 cents per on-line debit transaction. Visa and MasterCard charges are close to those on credit cards, around 1.4% of the purchase price.

The retailers' lawsuit-Wal-Mart Stores Inc. and The Limited Inc. are among the plaintiffs-states that in 1996, "retailers were forced to pay approximately $580 million in Visa check/MasterMoney interchange fees, compared with less than $90 million for typical on-line POS debit systems."

Security is another debating point. On-line advocates say their method is safer because of same-day posting of transactions, lowering loss and fraud risks. There is an added level of security that does not apply to credit cards or off-line debit: Customers must enter a personal identification number at the point of purchase.

The associations say that their posting method, which usually takes two to three days after an on-line authorization, is perfectly safe.

"The banks that own these networks really need to take a look at who the networks are serving," said Brian O'Hare, former president of Norwest Card Services. He contends banks' interests are best served through off-line debit.

Ruth Ann Marshall, executive vice president and group executive of Wilmington, Del.-based Electronic Payment Services Inc., said her company is "straddling." EPS, which operates the MAC network and the Buypass point of sale system, handles both types of debit transactions.

"We're in kind of a neutral position in that our core competency is in switching the transaction," Ms. Marshall said. "Whether it is on-line or off-line, you benefit."

MasterCard and Visa clearly lean toward the off-line MasterMoney and Visa check products.

Bank members "are not making money on (Visa's) Interlink or any other on-line product," said Robert H. Baker Jr., senior vice president of deposit and cash products at Visa.

"Why would any issuer promote on-line?" said David R. Campbell, executive vice president of strategic planning at Cleveland-based KeyCorp.

Mr. Campbell said that the issue matters less today than it will when the debit card market is more mature. At the stage when banks want to encourage any type of debit use, any revenues lost because of on-line's lower pricing are marginal.

BankBoston Corp. gives incentives to sales representatives who get customers to sign up for debit cards and encourages customers with rebates to use both kinds, said Tisha Capello, director of consumer payments and state marketing.

"The customer is not distinguishing" between on-line and off-line purchasing, Ms. Capello said.

For 1997, Visa reported a 72% increase in check card volume, to $93.7 billion. Transactions rose 66%, to two billion.

Star System Inc. of San Diego, the POS leader among the regionals, had a 72% jump in 1997 transactions, to 406 million. Overall on-line POS volume topped 1.4 billion in 1997, according to Faulkner & Gray's 1998 Debit Card Directory.

Debit cards have been around since the 1970s, but their recent blossoming has much to do with the card associations' off-line promotions, notably Visa's use of celebrities like Shirley MacLaine, former Sen. Bob Dole, and Deion Sanders in advertisements.

Surveys show that people in more than 80% of U.S. households are aware of debit cards, according to MasterCard and Visa. But they as yet account for only 2% of consumer purchases. Visa predicts both types of debit cards will claim 10% market share by 2001.

As more retailers caught on to the cost differences, their industry lawsuit's plaintiff list got longer. No settlement of the antitrust litigation is in sight, lawyers say, and the next hearing is not scheduled until December.

Meanwhile, merchant and network on-line advocates are trying to find subtle ways to tell consumers about the advantages of using a PIN pad.

Alan Markert, vice president of finance at the H.E. Butt grocery stores of San Antonio, said he likes the speed of on-line debit in comparison to paper checks at the checkout lanes. The relative costs of those methods is not his primary concern.

According to a recent study by the Food Marketing Institute, the supermarket trade group, the average cost of on-line transactions is 29 cents, of off-line transactions 80 cents, and handling a nonverified check 58 cents.

Though many merchants lean toward on-line debit, it still lacks the popularity of off-line.

Tensions over the two debit methods have led to a few calls to close the on-line/off-line pricing gap. But few observers expect that will happen.

Card issuers, merchants, acquirers, and retailers are in "entrenched positions" and will be "hard to move," said Mr. Campbell of KeyCorp.

Stan Paur, president and chief executive officer of Pulse EFT Association of Houston, is among the price-convergence advocates. He said competition between the two forms of debit "will eventually result in adjustments to both payment offerings."

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